The Winter Fuels Outlook from the Energy Information Administration (EIA) is projecting a larger-than-normal pull from natural gas storage and rising gas prices in the U.S., with the gas storage levels dropping from a record high in October to the low end of a five-year range in the spring of 2021.
During an October 7 webcast on the outlook, speakers noted uncertainties on weather and any economic recovery from the COVID-19 pandemic that can affect supply and demand, with Edward Morse of Citi Group deeming the upcoming winter “a season like no other.”
Morse, managing director and global head of commodity research at Citi, said the U.S. has become “the fulcrum of global prices” for natural gas due to the increased liquefaction capacity, LNG export facilities and that U.S. exports have no destination restrictions. As U.S. LNG export capabilities have increased, gas prices in Europe and Asia have more closely moved in concert with U.S. Henry Hub prices, meaning winter weather and gas price changes in the U.S. can have a dramatic effect on prices in other nations, Morse said.
With six different LNG export projects proving they are resilient to hurricanes and storms, the U.S. role as a global supplier has grown stronger, Morse said. Winter weather effects in the U.S. can move gas prices in Europe as high as $7.10/MMBtu under a 10% colder-than-normal season and as low as $2.10/MMBtu under a 10% warmer-than-normal season, he said.
The number of unknowns heading into the winter – besides the usual uncertainty surrounding weather predictions – can result in winter fuel price movements stemming from several issues, Morse said. Those include COVID-19 and a possible vaccine, elections in the U.S. and possible changes in the White House and Congress, the role of OPEC+ for oil supplies and foreign trade issues.
EIA’s Tim Hess presented the Winter Fuels Outlook data, where the agency is forecasting temperatures to be similar to the past 10-year average for most of the country. Energy consumption and home heating bills are expected to be higher than last year for most fuels, with heating oil costs low as the lone exception. Retail natural gas and electricity prices are expected to be similar to last winter, with propane prices higher and heating oil lower.
EIA expects more space heating demand for each heating degree day (HDD) forecasted in the outlook because more people are working and attending school at home, said Hess, product manager for the Short Term Energy Outlook (STEO) at EIA. That is the factor for higher consumer heating bills expected in the coming winter.
The large number of people working from home during the pandemic is still relatively new for EIA to work into its projections, especially with different state guidelines and other factors to consider, compared with past winter outlooks, Hess said.
With consumers facing higher heating bills compared with last winter, the pandemic’s effect is enormous for those who are struggling with utility bills, said David Terry, executive director of the National Association of State Energy Officials.
The EIA outlook has HDDs 5% higher than last winter nationwide, with regional variations due to colder-than-normal weather expected in the South and warmer-than-normal weather in the West. More HDDs indicate colder temperatures, and the regional variations have 10% more HDDs in the South from last winter and 1% fewer HDDs in the West.
The winter of 2019-2020 was warmer than normal and EIA is including a 10% colder and 10% warmer scenario besides the base case in the outlook, Hess noted.
Last winter “was one of the warmest winters on record,” and it is unlikely to be repeated this coming winter, said Mike Halpert, deputy director of the Climate Prediction Center in the National Oceanic and Atmospheric Administration.
When asked if the large number of wildfires in the western U.S. are expected to affect winter temperatures elsewhere, Halpert said fires generally do not have a role in weather circulation patterns and he minimized any possible effect for the coming winter.
The uncertainties on weather predictions and other factors for the upcoming winter make fuel price forecasts a bit more difficult, Morse pointed out. Even when natural gas storage levels have been quite high, sudden price spikes are possible if the market is caught off guard by a sudden onset of cold weather, he said.
EIA is forecasting working gas storage levels to reach more than 4 Tcf at the end of October, which would be a record high for that time of year. Under the base case scenario in the outlook, EIA expects the working gas inventory to be at 1.7 Tcf at the end of March 2021, which would be 6% lower than the five-year average for the end of March. Under the 10% colder scenario in the outlook, EIA has storage at 1.2 Tcf at the end of March 2021, which would be 35% lower than the five-year average, while the 10% warmer scenario has the storage withdrawal season ending at 2.1 Tcf.
Besides the colder temperatures compared with last winter, the agency is expecting lower natural gas production to increase storage draws this winter. The gas production forecast calls for an average of 87.7 Bcf/d in the upcoming winter, which is 7.8 Bcf/d below last winter.
The production gains of the past several years have EIA projecting gas supplies to be adequate to meet winter demand, though it said wholesale price volatility and localized wholesale price spikes could occur with severely low temperatures.
EIA is forecasting Henry Hub spot gas prices to average $3/MMBtu in the winter, with LNG exports and lower production putting upward pressure on prices from their current levels. As it noted in the October STEO, EIA expects spot gas prices to peak at $3.38 in January of 2021.
Morse of Citi has a more limited range but similar average in his gas price forecast, with a fourth-quarter 2020 average of $2.80/MMBtu and a first-quarter 2021 average of $3.20/MMBtu.
EIA noted regional variations in gas prices with winter weather is common, and that prices in New England typically have been among the highest in the nation due to pipeline capacity constraints and delivery limitations during the winter. “However, increased pipeline connectivity along with relatively low prices globally for LNG, which is an additional source of supply in New England, have helped bring residential natural gas prices in the Northeast closer to the U.S. average,” EIA said.
For the 4% of households nationwide that use heating oil as their primary heating fuel, EIA expects heating bills to average $1,221 this coming winter, which would be 10% below what was spent last winter. Lower crude oil prices and abundant oil supplies were the factors mentioned, even with home heating use projected to rise due to the COVID-19 pandemic.
The Northeast has more homes that rely on heating oil compared with other regions, though the number is declining. About 19% of the households in the region use heating oil, compared with 24% seven years ago, as residents have switched to natural gas and electricity for space heating, EIA said.
Households that use electricity for heating are expected to spend an average of $1,209 this winter, which is 7% higher than the typical winter bill. However, that winter bill forecast for electricity includes both heating and non-heating uses for electricity, EIA said.
Nearly half of the households in the U.S. use natural gas for space heating, and their bills are expected to average $572 this winter, which is 6% higher than last winter. The lower natural gas prices heading into the winter are more than offset by higher gas usage in the forecast, EIA noted.
By Tom Tiernan firstname.lastname@example.org